DP9168 Firms, Destinations, and Aggregate Fluctuations

Author(s): Julian di Giovanni , Andrei A. Levchenko , Isabelle Mejean

Publication Date: October 2012

Keyword(s): Aggregate Volatility , Firm-Level Shocks , Large Firms , Linkages

JEL(s): E32 , F12 , F41

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP9168.asp

This paper provides a forensic account of the role of individual firms in generating aggregate fluctuations using data covering the universe of French firms for the period 1990–2007. We derive a theoretically-founded set of estimating equations that decompose firms’ annual sales growth rate into different components. The firm-specific component contributes substantially to aggregate sales volatility, mattering about as much as the components capturing shocks that are common across firms within a sector or country. We then decompose the firm-specific component to provide evidence on two mechanisms that generate aggregate fluctuations from microeconomic shocks: (i) when the firm size distribution is fat-tailed, idiosyncratic shocks to large firms contribute to aggregate fluctuations (Gabaix, 2011), and (ii) sizable aggregate volatility can arise from idiosyncratic shocks due to input-output linkages across the economy (Acemoglu et al., 2012). We find that firm linkages are approximately twice as important as granularity in driving aggregate fluctuations.